What Is A Short Sale?
A short sale is a sale of real estate/property in which the proceeds from selling the property falls short of the balance of debts secured by liens against the property. Whereby the lien holder(s) agree to release their lien on the real estate by accepting less than the amount owed on the debt.
What Happens To The Unpaid Balance?
Any unpaid balance owed to the lender(s) is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties.
Why Short Sale?
If you’re concerned that your house may go into foreclosure and you haven’t qualified for alternatives that would let you keep the property, a short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower.
By completing a short sale rather than allowing your house to go through foreclosure: (1) you avoid eviction (2) your house won’t be sold at a public sale or auction (3) you can have some control over the selling process (4) depending on your circumstances, you could qualify for financial assistance to help with relocation costs.
Who Qualifies for a Short Sale?
- You are ineligible to refinance or modify your existing loan/mortgage.
- You are experiencing long-term financial hardship. (See hardships below.)
- You owe more on the property than it is worth.
- You are not able to sell your home at a price that will satisfy what you owe on your mortgage(s).
- You’re unable to afford your current monthly mortgage payment.
- You’ve received an offer on the property.
Hardships that Qualify for a Short Sale:
- Loss of income
- Loss of employment
- Business Failure
- Damage to the property (could have been under insured)
- Death of a Spouse or wage earner
- Death of a non-wage earner (example: a family member who was watching the seller’s children and now the seller has to pay to put the children in child care; or they were a financial contributor even though they weren’t on mortgage)
- Severe illness
- Inheritance (inherited an underwater property, cannot pay taxes etc.)
- Relocation
- Divorce
- Military Service
- Payment increase or mortgage adjustment
- Insurance or tax increase
- Legal separation
- Too much debt vs income
- Incarceration
- Combination of above
How Long Does It Take To Do A Short Sale?
“It’s a two-to-three month process with an agent that knows what to do,” says Marcus Fleming of Redfin.
“With an inexperienced agent, it can be an eight to nine month process.”
How Much Discounts On Short Sales?
Short sales can still bring home buyers deals, but the steep discounts seen a few years ago are gone because of the housing market’s recent improvement. Inventory in many hot markets is extremely tight so banks haven’t been willing to accept less than the value of the home.
“Short sales aren’t selling at a 20% discount. Those deals are now a 5% or 10% discount,” says Marcus Fleming of Redfin.
Credit Implications:
A short sale negotiation resulting in a reduction of the amount a borrower owes towards a debt acts as a type of settlement or renegotiation of a borrower’s debt. Should the creditor report the debt reduction to credit reporting agencies, it can adversely affect a person’s credit report.
Despite significant misreporting on the topic, damage to one’s credit due to a short sale is really no different from that of a foreclosure. The primary difference is which debts are settled. In a short sale, all liens on the property are settled. In a foreclosure, the first mortgage may show as settled, but subordinate liens typically remain, further impacting the borrower’s credit worthiness and ability to qualify for a new home loan.
As of 2011, national and state laws and industry standards for both real estate sales and lending are in an ongoing and rapid state of change. Borrowers interested in pursuing a short sale should ensure that they are up-to-date with rules and regulations as it applies to their situation. Also, borrowers need to obtain up-to-date information from multiple professionals, including an accountant, an attorney, and a real estate broker—all of whom should be specialized in loss mitigation and should be licensed to practice in the state where the real estate is located.
